Addus Sets Revenue Record, Moves Forward with Hospice

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Addus HomeCare (Nasdaq: ADUS) achieved a new record for net service revenue in the fourth quarter of 2017 and recently made its first serious foray into hospice. Going forward, Frisco, Texas-based Addus will evaluate how the new service line complements its existing personal care business as the company seeks to expand in 2018.

For the last 18 months, Addus leadership has been open about pursuing hospice and home health opportunities, and the recently announced $40 million acquisition of Ambercare is a first step in that direction, CEO Dirk Allison said Tuesday on the company’s fourth-quarter and full-year 2017 earnings call.

Addus is one of the largest providers of Medicaid-reimbursed personal home care in the United States, with more than 110 branches in 24 states. The company’s leadership has been talking about adding more clinical services to complement its personal care component, and Ambercare fit the bill. The Albuquerque, New Mexico-based company offers personal care, hospice and home health, with about $30 million of 2017 revenue coming from hospice and $27 million coming from personal care and home health. Ambercare is also located in a state where Addus already had a presence.

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“Once we close the Ambercare transaction … we will be able to see how that works with our personal care and hospice markets there, and whether or not that is something that can be transferred into other markets where we operate,” Allison said. “But we will continue to look at the clinical side, preferably in those acquisitions that come with personal care, but not absolutely exclusively.”

The mergers and acquisitions market for hospices has been hot, with high multiples particularly for standalone hospices, he added. Multiples are more reasonable for hospices that are integrated with personal care providers.

Addus is interested in hospice for a few reasons, including potential financial upside. On personal care, Addus’ margin is in the range of 8% to 9% of earnings before interest, taxes, depreciation and amortization (EBITDA), with a goal of 10%. Hospices tend to operate in the mid-teens, Allison said.

“So as we enter into that particular market … if we continue to do a good job in operating those businesses, we should see the hospice side help our margins a bit,” he said.

But adding new service lines is a strategic move as well, and one that Addus is not alone in making. Other large home health and personal care businesses—including Baton Rouge, Louisiana-based Amedisys (Nasdaq: AMED) and Louisville, Kentucky-based ResCare—are expanding across the continuum, with the goal of gaining more sway with managed care partners.

Addus has been focused on managed care as well, with the majority of its markets on a managed Medicaid model. The proposal to include non-skilled home care as a benefit in Medicare Advantage suggests further opportunities in managed care, Allison said on Tuesday’s call.

Strong financials

The move into hospice comes as Addus posted strong financial results for the fourth quarter of 2017. Net service revenue increased 8% to hit a record $112 million. CFO Brian Poff also touted the company’s EBITDA.

“The company’s adjusted EBITDA was $10.6 million for the fourth quarter of 2017, an increase of 14.5% from the same prior-year quarter,” Poff said. “This was the first time this has been above $10 million for a quarter and at 9.5% of revenue is the highest margin we’ve achieved since the management changes began in the first quarter of 2016.”

Fourth quarter earnings per share of $0.46 beat analyst expectations by $0.02, while revenue of $111.96 million beat analyst expectations by $1.34 million.

“Over the past two years, we have undertaken a number of initiatives, including cost reductions, creation of a new management team, conversion of important software systems, and a dedicated effort to improve operating performance at the agency level,” Allison said. “These initiatives have helped us to improve our operations leading to higher profitability.”

There are some challenges headed into 2018, including labor cost pressures tied to increasing minimum wage in New York and Illinois. So far, Addus has been able to negotiate with its managed care partners to keep reimbursement in line with wage increases, although this is an ongoing effort, Poff said.

Addus has also been making a concerted effort to expand its footprint outside Illinois, where the company was based until the move to Texas last year. Budget battles in the Land of Lincoln have wreaked havoc with Addus’ reimbursement streams in the past, and while this appears to now be stable, the company is eyeing other markets for growth. About 50% of Addus’ overall business was still in Illinois as of the end of 2017, but the Ambercare acquisition will change this, Poff noted.

Addus shares were up 2.08%, at $36.80, as of mid-afternoon on Tuesday.

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